The stock market is doing well this year after a tough start to 2026 that saw the S&P 500 (^GSPC 0.16%) finish the first quarter in the red. The index has, however, recovered and has set new record highs along the way. It's now up 8% since the beginning of the year, as it continues to do well despite both economic and geopolitical uncertainty.
Although investors have been bullish, Warren Buffett isn't feeling that same level of excitement. The billionaire investor who is now the former CEO of Berkshire Hathaway has been fairly cautious with stocks in recent years as valuations have been soaring, and he's noticing an uptick in the appetite for risk.
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Investors are taking on greater risk
At Berkshire's annual meeting, in an interview with CNBC, Buffett warned of the dangers of investing right now, likely also explaining why his company has been fairly cautious in recent years. "We've never had people in a more gambling mood than now." He says that there are "silly" prices for many stocks in the market today.
Buffett is famously known for his cautious approach, warning investors to "be fearful when others are greedy." Valuations are indeed extremely high, with the Shiller price-to-earnings ratio, which considers inflation-adjusted earnings over the past decade, being at its highest level since the early 2000s, just before the dot-com crash.
The S&P 500 has been coming off three straight years of above-average returns. And with it still building on its gains this year, valuations are continually rising higher.
Now may be a time to exercise caution
Although the S&P 500 continues to rally higher, buying into the rally can leave you with some high-priced stocks that may be destined for significant corrections later on. Ignoring earnings multiples and valuations is risky because, while the market may look past them during bullishness, the danger is that if the music stops and a correction is forthcoming, those highly valued stocks may have the most room to fall.
Buffett still believes in investing for the long term and doesn't get out of the market just because valuations are high. But for investors, this may be a crucial time to reduce risk and ensure you have a well-balanced portfolio. Going all in on tech, for instance, may seem like an attractive option for long-term growth, but it can also result in sharp and significant declines later on. Investing in value stocks or income-generating investments can be ways to diversify your portfolio and reduce your risk while also remaining invested in the overall market.
